The rand touched its worst level against the dollar in five months on Monday, kicking off a week that will see the Reserve Bank announce its interest rate decision, and inflation numbers.
Bloomberg reported that the dollar’s strength is poised to pile further pressure on emerging market currencies including the rand.
As the dollar clocked up its longest rally since 2015, the MSCI Emerging Markets Currency Index closed on Friday below its 200-day moving average for the first time in more than a year, heralding more losses. The gauge slid 1.3% in the week, its worst performance since 2016.
Not one developing-nation currency rose last week as the dollar advanced, with US 10-year yields closing above 3% the last five days, Bloomberg said.
GAM UK Ltd’s Paul McNamara told the news agency that nothing worries him more than the strength of the dollar. “The rest is noise,” the London-based fund manager said.
What’s more, the negative correlation between the dollar and developing-nation currencies is deepening.
“Unless the fresh set of US data scheduled next week is seriously disappointing, EM currencies will struggle to trim their recent losses against the dollar, which is supported by rising yields on US Treasuries,” said Piotr Matys, a strategist at Rabobank in London. Markets expect the Federal Reserve to raise rates at least twice more this year, he added.
The combination of higher debt levels and share of debt denominated in foreign currency means many emerging markets are now more exposed to dollar appreciation than in 2009, amid signs the robust growth in developing economies may be slowing, the Institute of International Finance said in a May 17 note.
Reuters meanwhile, noted that the rand was at its weakest point against the greenback in five months as trade tensions between the United States and China, eased after US Treasury Secretary Steven Mnuchin said on Sunday that the trade war was “on hold”.
Andre Botha, dealer at TreasuryONE, said: “The scenario at the moment is favourable for the US dollar as news and data out other developed markets pale in comparison to the positive sentiment and data out of the US.
“Emerging Markets currencies that are in the firing line are those countries with twin deficits of which South Africa is unfortunately one. If the US dollar surge continues unabated we could see the rand breaking back above R13.00 level for the first time in 2018. There seems to be no stop in the US dollar rally at the moment, but the feeling is that the elastic is becoming extended.”
“This week we have the MPC meeting in South Africa, and the expectation is that the MPC will hold rates unchanged especially with the current ZAR weakness. There will also be a release of the findings of rating review from S&P on Friday, should there be any change in sentiment from S&P we could see the rand recover a little heading into the weekend,” Botha said.
“Currently, all EM currencies are on the back foot and will continue to be so should the US dollar rally continue and sentiment from other EM’s not improve. We expect the rand to make a charge up to the R13.00 level.”
By 09h50 on Monday (21 May), the rand traded at the following levels against the major currencies:
- Dollar/Rand: R12.87 (0.73%)
- Pound/Rand: R17.26 (0.65%)
- Euro/Rand: R15.09 (0.52%)